Category Archives: California Construction Lien


What Does a Construction Lien, Beyonce and Jay-Z Have in Common?

Construction Lien Placed on Beyonce and Jay-Z New Home

They may have an estimated combined net worth of over $1 billion, but Beyonce and Jay-Z are still subjected to the powerful effect of construction liens. The new 30,000 square foot home the couple bought earlier this year just had a California construction lien filed against it by a pool builder who claims its was not paid for its work. The pool (which is the fourth pool installed at the estate), was actually constructed by Pool & Spa Builders for the prior homeowners. According to the construction lien documents, Pool & Spa Builders claim the prior owners failed to pay it $87,729.92 for work performed. After Pool & Spa Builder completed the work, the property was sold to the Carters, who are now stuck dealing with this lien.

Because of the transfer of ownership, there is a question as to whether the construction lien is valid against the property. In the normal course, a lien would be filed, and eventually the lienor would attempt to foreclose on it. But usually liens are filed before a property is sold…and if a property is sold after a lien is filed, the lienor is usually paid out of the sale proceeds. Does is seem fair then to allow a lienor to file a construction lien after a sale has taken place, subjecting the new owners to the previous owners’ misdeeds? Probably not, but some states do allow it.

For the most part, construction lien laws do not allow the foreclosure of a construction lien if it is filed after the transfer of ownership. In some states, a lienor can file a Notice when it performs work that changes this rule because the notice gives a new owner actual knowledge that someone is working on the project and may file a lien; but most states simply protect the innocent purchaser. In that case, the lienor has the right to sue the owner of the property for whom it did work, but it will not have the security of the proceeds of the sale of a property.

In Mr. & Mrs. Carter’s case, though, given that the sale is the highest recorded in Los Angeles County this year, the construction lien will probably be resolved quickly. One advantage of a construction lien is that it certainly gets the attention of property owners, and most owners work through the issue to resolve the lien.

In California, to file a construction lien you must comply with specific deadlines. If you miss these deadlines, your lien will be invalid (note that some clerks still file liens even after the deadlines, but that does not mean the lien will be determined to be valid by a court of law). 

Deadlines are as follows: General Contractor: a construction lien must be filed within 60 days of notice of completion or cessation, or 90 days after the general contractor’s work is completed. Note that the time to file after the work is completed is longer, because many owner do not provide a notice of completion or cessation.  Subcontractors and suppliers: liens must be filed within 30 days of notice of completion or cessation or 90 days after entire job is completed (for a subcontractor’s purposes, completion is defined as when an owner or its agent begins occupation, work is accepted by the owner, or the cessation of labor for 60 days).

When filing a California construction lien, it is important to verify property owner mailing address and legal description or property. California has strict privacy laws, so most county clerks no longer provide owner information online. For the most part, a phone call to the county clerk will help you find the correct owner information, but some clerks require that you either visit the clerk’s office, or mail a request for the information.

California also requires a preliminary notice in order for construction lien claims to be valid. A Notice to the Owner that materials or labor are being delivered to the project should be sent within 20 days of the commencement of a subcontractor or supplier’s work. That California Preliminary Notice does not need to be filed, but it must be sent to the owner. If a subcontractor or supplier serves a Notice to Owner late, then their lien is limited to the value of the labor and materials they supplied in the twenty days prior to serving the notice and anything after the notice is served. This can severely limit the amount of the lien claim is the notice is served late.

In addition to a preliminary notice, many potential lienors choose to file a Notice of Intent to file a construction lien, prior to actually filing the construction lien itself. The advantage of filing a Notice of Intent is that it gives a warning to the owner that a lien is going to be filed if the disputed claim is not paid or otherwise resolved. Notices of Intent can be very effective for this purpose, and allows the owner to get directly involved in any last ditch efforts to resolve a non-payment issue.

California’s Mechanic Lien Requirements

In California, liens filed on private property are known as Mechanic’s Liens. When a California mechanics lien is filed with regard to work performed on privately owned property, it attaches to and encumbers the fee simple ownership of property.

In most circumstances, California does not allow mechanics liens to be filed on government owned property.  However, nearly every project on government owned project is required to have a payment bond in place to protect subcontractors and suppliers. Filing a claim against the payment bond secures your claim for money in a way that is similar to filing a lien claim. In addition to the payment bond, stop notices may also be filed.  Both bond claims and stop notices are discussed in more detail below.

Contractors, as well as subcontractors, design professionals, sub-subcontractors and material suppliers can file a California mechanics lien. If a company supplies material to a material supplier, they are not eligible to file a California mechanics lien claim.

Within 20 days of the commencement of work on the property, subcontractors and suppliers should provide written notice to the owner, the general contractor and the construction lender that they are performing work on the property. If the notice is served late, then the claimant can claim a California construction lien for the value of the labor or materials provided in the 20 days preceding the service of the notice and thereafter.

Prime contractors must file a California claim of lien within 60 days after a notice of completion or notice of cessation is recorded, or if no recording of completion or cessation is accomplished, within 90 days after the completion of the work of improvement. Subcontractors and materialmen must file a California claim of lien within 30 days after a notice of completion or notice of cessation is recorded, or if no recording of completion or cessation is accomplished, within 90 days after the completion of the work of improvement.

California’s Mechanics Lien

In California, liens filed on private property are known as Mechanic’s Liens. When a California mechanics lien is filed with regard to work performed on privately owned property, it attaches to and encumbers the fee simple ownership of property.
In most circumstances, California does not allow mechanics liens to be filed on government owned property.  However, nearly every project on government owned project is required to have a payment bond in place to protect subcontractors and suppliers. Filing a claim against the payment bond secures your claim for money in a way that is similar to filing a lien claim. In addition to the payment bond, stop notices may also be filed.

Pre-lien notices are required to be served prior to filing a California mechanics’ lien claim. Within 20 days of the commencement of work on the property, subcontractors and suppliers should provide written notice to the owner, the general contractor and the construction lender that they are performing work on the property.   If the notice is served late, then the claimant can claim a California construction lien for the value of the labor or materials provided in the 20 days preceding the service of the notice and thereafter.

Prime contractors must file a California claim of lien within 60 days after a notice of completion or notice of cessation is recorded, or if no recording of completion or cessation is accomplished, within 90 days after the completion of the work of improvement. Subcontractors and materialmen must file a California claim of lien within 30 days after a notice of completion or notice of cessation is recorded, or if no recording of completion or cessation is accomplished, within 90 days after the completion of the work of improvement.

Check out our web page at www.LienItNow.com for more information about state guides and our processes.

Rental Demand Drives New Commercial Construction in Southern California

The long dry spell in Los Angeles’s commercial construction market may be comming to a close.  The Los Angeles Times recently reported that commercial real estate developers are building again, buoyed by strong demand for apartments. With unemployment still high and Americans still skittish about putting their money in a house that may still decline in value, rents have increased as that option has become more palatable.
According to the LA Times, the increase in construction in Southern CA is attributable to the “revival of projects that stopped during the recession, but many others are new from the ground up…”
As building gains economic steam, it is important for everyone in the building process to preserve their rights to get paid for the labor or materials they provided. Mechanics lien are an important part of that process.  In California, liens filed on private property are known as Mechanic’s Liens. When a California mechanics lien is filed with regard to work performed on privately owned property, it attaches to and encumbers the fee simple ownership of property.

Click here for more information on California mechanics liens, or give LienItnow.com a call at 888-543-6765.

Pay if Paid v. Pay When Paid Clauses – Which is Which and Who Cares?

Over the last four years we’ve all had to deal with the funding crashes that followed the 2008 financial crisis.  In those four years, many have also learned the difference between pay-if-paid clauses and pay-when-paid clauses. But what is the difference between the two, when should each one be used, and why should it matter to you?


If you’re a contractor, subcontractor, or sub-subcontractor, you should take the time to find out how and if a pay-when-paid and pay-if-paid clause will effect you. As a contractor, how you word your contract could mean financing a project for an insolvent owner that never pays you. As a subcontractor, if the owner goes out of business you may never get paid for work you do if the contractor never gets paid.  In many states, all this depends on some simple wording. 


We’ll explain what a pay-if-paid and what a pay-when-paid clause is one at a time so you can compare the differences:


Pay When Paid Clauses


The phrase “pay-when-paid” is deceiving: most people believe pay when paid means that if the contractor does not receive payment from the owner, then he has no obligation to pay his subcontractor.  However, most courts have interpreted “pay-when-paid” as timing provisions. In New York, for instance, the court has defined pay-when-paid clauses as permitting a delay in payment for a reasonable period of time.  In short, courts refuse to permit the risk of non-payment to be shifted to the subcontractor based on pay when paid provisions.  According to an article titled “Pay-If-Paid Clauses: Freedom of Contract or Protecting the Subcontractor from Itself?“,written by William M. Hill and Mary-Beth McCormack in the Construction Lawyer, Winter 2011 edition, when interpreting pay-when-paid clauses, Courts usually point to the “harsh effects of ‘conditions precedent’, and a general policy of avoiding them if other reasonable readings of a contract is possible.”

Courts have not uniformly construed “pay-when-paid” clauses. One of the premiere cases “that squarely addresses the issue is Seal Tite Corp v. Ehret, Inc., 589 F.Supp. 701 (D.N.J. 1984). In Seal Tite, the court, following the reasoning expounded in the Sixth Circuit case, Thos. J. Dyer Co. v. Bishop Int’l Engineering Co., 303 F.2d 606 (6th Cir. 1962), construed a subcontract “pay-when-paid” provision as postponing payment for a reasonable period of time rather than a conditional promise to pay by the general contractor. The court explained that because the payment clause did not make reference to the possibility of the owner’s insolvency, but did refer to the amount, a time and method of payment, the clause was merely a provision affording the general contractor a reasonable time to procure from the owner the funds necessary to pay the subcontractor. Seal Tite, 589 F.Supp. at 704 (quotations omitted). Ultimately, the court’s determination turned on whether there is any indication in the payment clause that the subcontractor would undertake any risk in the event the owner of the project would become insolvent. Id. Simply put, there must be express language clearly showing the intention of the parties to shift the risk. Id. The Dyer approach has been recognized as the leading decision in this area. Lafayette Steel Erectors, Inc. v. Roy Anderson Corp., 71 F. Supp. 2d 582, 587 (S.D. Miss. 1997) (“Dyer has been cited and relied upon repeatedly . . . .”); Mrozik Constr., Inc. v. Lovering Associates., Inc., 461 N.W.2d 49, 51 (Minn. Ct. App. 1990) (describing Dyer as “a leading case on which the Restatement [(Second) of Contracts] illustration was based”); Watson Constr. Co. v. Reppel Steel & Supply Co., 598 P.2d 116, 119 (Ariz. Ct. App. 1979) (terming Dyer “a leading decision in this area”).” See Fixture Specialists, Inc. v. Global Construction, LLC





Pay-If-Paid Clause – Majority Rule


Pay-if-paid clauses are generally enforced by courts.  Two big exceptions to the enforcement of pay-if-paid clauses are New York and California, which have held that pay-if-paid clauses are unenforceable and against public policy.  Let’s deal with the majority rule first though.


Enforcing pay-if-paid clauses is more palatable to courts because there is no “condition precedent” to payment.  The contract’s pay-if-paid generally clearly states that payment to the subcontractor is to be directly contingent upon the receipt by the general contractor of payment from the owner.  In MidAmerica Const. Management Co., Inc. v. Mastec North America, Inc., 436 F.3d 1257 (10th Cir. 2006), the Federal Court for the Tenth Circuit first noted the distinction between “pay-when-paid” and “pay-if-paid” clauses:


A typical “pay-when-paid” clause might read: “Contractor shall pay subcontractor within seven days of contractor’s receipt of payment from the owner.” Under such a provision in a construction subcontract, a contractor’s obligation to pay the subcontractor is triggered upon receipt of payment from the owner. Most courts hold that this type of clause at least means that the contractor’s obligation to make payment is suspended for a reasonable amount of time for the contractor to receive payment from the owner. The theory is that a “pay-when-paid” clause creates a timing mechanism only. Such a clause does not create a condition precedent to the obligation to ever make payment, and it does not expressly shift the risk of the owner’s nonpayment to the subcontractor. . . .


A typical “pay-if-paid” clause might read: “Contractor’s receipt of payment from the owner is a condition precedent to contractor’s obligation to make payment to the subcontractor; the subcontractor expressly assumes the risk of the owner’s nonpayment and the subcontract price includes this risk.” Under a “pay-if-paid” provision in a construction contract, receipt of payment by the contractor from the owner is an express condition precedent to the contractor’s obligation to pay the subcontractor. A “pay-if-paid” provision in a construction subcontract is meant to shift the risk of the owner’s nonpayment under the subcontract from the contractor to the subcontractor. In many jurisdictions, courts will enforce a “pay-if-paid” provision only if that
language is clear and unequivocal. Judges generally will find that a “pay-if-paid” provision does not create a condition precedent, but rather a reasonable timing provision, where the “pay-if-paid” provision is ambiguous.


Pay-If-Paid Minority Rule


Regardless of the language used in the pay-if-paid clauses, courts in New York and California will not enforce such clauses, holding the clauses to be void and unenforceable as contrary to public policy.”  Interestingly, the courts based their decisions on New York’s mechanics lien law and California’s mechanics lien law. In so finding, the courts held that conditional payment provisions effect an indirect waiver of a subcontractor’s protected mechanics’ lien rights.  


In yet some other states, pay-if-paid clauses have been outlawed by statute: generally in the “prompt payment” acts that have been enacted throughout the country.  Over 32 states have some type of prompt payment act, which requires timely payment of amounts due from contractors to subcontractors.  Massachusetts is one of these states, voiding any pay-if-paid clauses for projects worth over three million dollars, unless the project involves residential construction consisting of 4 or fewer dwelling units.  Illinois, Maryland, Missouri, Wisconsin, North Carolina and South Carolina have banned pay-if-paid clauses for all private projects.

California Mechanics Liens: The Nutshell Version

The internet is full of long explanations regarding mechanics liens.  From Wikipedia to About.com,  Once of the best explanations we’ve found (outside our own FAQs about California mechanics liens) is from the Sacramento County Public Law Library website.   Mechanics liens and their requirements are all laid out in an easy to understand format there.  If you don’t want to take the time to go to their site, you can take a look below at what they have to say about mechanics liens, preliminary notices, stop notices, and removing a lien or stop notice.




A Mechanics’ Lien is an effective remedy for contractors, subcontractors, and others involved in the construction or improvement of real estate to resolve payment problems. If a service or materials provider records a Mechanics’ Lien against the real estate being improved, the owner can not easily sell or refinance the property without first paying off the debt secured by the lien. A Mechanics’ Lien motivates the owner to make sure the contractors get paid, and is a prerequisite to filing a foreclosure action on the property.  


BASICS:
Preliminary Notices
Claimants who do not have a direct contractual relationship with the owner (e.g., subcontractors) must provide a Preliminary Notice within 20 days of furnishing labor or materials to the job. This ensures that the owner is aware of a potential claimant, so that appropriate steps can be taken to confirm that the contractor is paid. Preliminary Notices must be provided to the owner, general contractor, and lender.
Mechanics’ Liens
Mechanics’ Liens are available to almost anyone who contributes labor, services, or materials to a real estate improvement project. A Mechanics’ Lien is used to exact payment out of the real estate itself by placing a lien on the property, making it difficult for the owner to sell or refinance the property, and if necessary, allowing the lien holder to go to court to have the property sold at auction. As of January 2011, a Notice of Mechanics Lien and a Proof of Service of Affidavit is now required.
Stop Notices
A Stop Notice attaches to the owner’s undisbursed construction funds, rather than to the property itself, as is the case in a Mechanics’ Lien. A Stop Notice compels the owner or lender to hold the remaining construction funds so that claimants can recover for work already completed. Stop notices are not available to claimants with a direct contractual relationship with the owner.
Removing a Lien or Stop Notice
Once a Mechanics’ Lien has been recorded, the claimant must file a court action to enforce the lien within 90 days. If no court action is filed by that time, the lien is no longer valid. However, many title companies don’t recognize this fact, and require that the lien be removed before you can pass clear title to a buyer. The easiest way to clear this lien is to ask the lienholder to file a Release of Lien. If they will not, you can petition the court to release the property from the Mechanics’ Lien.
* adapted from Preparing and Recording Your California Mechanic’s Lien on Private Works of Improvement, James A. Steele; and Contractor’s and Homeowners’ Guide to Mechanics’ Liens Stephen R. Elias.
For more information on California Mechanics Liens, take a look at the following books and websites, including our own:
SELF HELP BOOKS
Contractors’ and Homeowners’ Guide To Mechanics’ Liens
KFC 229.Z9 E43
This book covers the topic of Mechanics’ Liens from the perspective of both the homeowner and contractor, including forms and instructions.

Handling Mechanics’ Liens and Related Remedies (Private Works) KFC 229 .H86
This CEB Action Guide describes the rights and remedies, including Mechanics’ Liens, stop notices, and bonds of the principal parties involved in a private work of improvement.

Preparing And Recording Your California Mechanics’ Lien: On Private Works Of Improvement
KFC 229. Z9 S74
This title assists contractors in preparing their Mechanics’ Liens and bonded stop notices on private works of improvement located within the state of California and includes completed sample forms.

IN DEPTH RESEARCH
California Mechanics’ Lien Law and Construction Industry Practice
KFC229 .M31
California Mechanics’ Lien Law provides in-depth treatment of the basic law and procedure relating to works of improvement, from the standpoint of the contractor.

California Mechanics’ Liens and Related Construction Remedies
KFC229 .C3
This CEB practice guide simplifies the procedural maze of Mechanics’ Liens, stop notices, and bond remedies.


FORMS

WEBSITES
LienItNow.com
LienItNow provides comprehensive California Lien Law Statutes and answers to frequently asked questions on California mechanics liens.
Click to view LienItNow’s California lien filing process.
American Subcontractors Association of California
The American Subcontractors Association of California provides information on California Lien Laws.
http://www.asacalif.com/mechanics.html
California Architects BoardThe California Architects Board is one of numerous boards, bureaus, commissions, and committees within the Department of Consumer Affairs responsible for consumer protection and the regulation of licensed professionals. This guide produced by the California Architects provides general information on Mechanics’ Liens.
http://www.cab.ca.gov/pdf/misc/mechanics_lien_law.pdf  
Contractors State License BoardThe Department of Consumer Affairs, Contractors State License Board provides a detailed guide to assist in understanding Mechanics’ Liens.
http://tinyurl.com/7k9jrm
Nolo Press Read this legal guide to learn how to protect yourself from Mechanics’ Liens if your contractor fails to pay subcontractors or suppliers.
http://tinyurl.com/k4obf

California Mechanics Liens and Stop Notices “How To”

In California, the construction lien law is very specific. In addition to simply filing a construction lien, a claimant needs to make sure that it complied with all the pre-requisites that the mechanics’ lien law requires.

Liens filed on private property or on funds relating to a public project are known as Mechanic’s Liens. When a lien is filed with regard to work performed on privately owned property, it attaches to and encumbers the fee simple ownership of property.  On a private project, the mechanics’ lien places an encumbrance on the property that makes it difficult to resell or re-finance the property without first removing the lien.

Contractors, as well as subcontractors, design professionals, sub-subcontractors and material suppliers can file a lien. If a company supplies material to a material supplier, they are not eligible to file a lien claim.

In California, in order to file a lien, some claimants must fulfill some prerequisites.  Within 20 days of the commencement of work on the property, subcontractors and suppliers should provide written notice to the owner, the general contractor and the construction lender that they are performing work on the property. If the notice is served late, then the claimant can claim a lien for the value of the labor or materials provided in the 20 days preceding the service of the notice and thereafter.  Pre-notices are required to be served prior to filing a mechanics’ lien claim.

With regard to the lien filing itself, there are timing restrictions.  Prime contractors must file a claim of lien within 60 days after a notice of completion or notice of cessation is recorded, or if no recording of completion or cessation is accomplished, within 90 days after the completion of the work of improvement.

Subcontractors and materialmen must file a claim of lien within 30 days after a notice of completion or notice of cessation is recorded, or if no recording of completion or cessation is accomplished, within 90 days after the completion of the work of improvement.

California does not require that, in order to file a lien, a claimant have a written contract.  Oral contracts are sufficient if the lienor has sufficient documentation to show the existence of an agreement or that it performed the work for which it is filing a construction lien.

Another effective tool to collect receivables on a construction project, in addition to a lien, is a Stop Notice.  A Stop Notice can be filed on both public and private projects, and is a notification that has the ability to enhance the effectiveness of a mechanic’s lien. A Stop Notice, or a notice to withhold funds, is sent to the company that is financing or funding the construction funds for a project. Once that company receives the Stop Notice, that company has notice that it should withhold sufficient money to satisfy the stop notice claim. The purpose of the Stop Notice is to provide the lender, financiers or funders of the construction project notice that there is money owed to a contractor, subcontractor or supplier so that an inquiry can be made as to why that money is not being paid. The 20 day pre-notice is required to be eligible to file a Stop Notice.

For more information on filing a California Construction Lien, a California Mechanics Lien, or a California pre-lien notice, please visit http://www.lienitnow.com/california-faq.asp.